Corporate Governance

Shareholder Access and the Advocacy Role of Delaware in the Corporate Governance Debate: The Legislative Non-Solution (Part 5)

By J Robert Brown Jr.

We are examining the Amicus Brief submitted by the State of Delaware in Business Roundtable v. SEC, the case challenging the SEC's rule providing certain shareholders with access for their nominees to the proxy statement.

Those arguing for "private ordering" with respect to shareholder access often point to Section 112 of the DGCL.  The provision specifically authorized access bylaws by Delaware corporations.  The State's Brief makes the same point. 

• Despite its developed jurisprudence on elections, prior to 2009, there was no Delaware statute that addressed whether a corporate bylaw could provide nominating stockholders with the right to use the corporation's proxy materials. In August of 2009, the Delaware General Assembly addressed this issue by enacting the two new provisions of the DGCL, sections 112 and 113, which expressly authorize bylaws establishing, respectively, proxy access and rights to reimbursement of proxy solicitation expenses.

The language in the Brief was carefully drafted.  It merely mentions that until 2009, there was no statute that addressed access.  It does not say that access was, prior to 2009, unauthorized. 

In fact, companies could have provided access (i.e. private ordering) but inconveniently did not.  Section 112 merely clarified the law by making clear that management could adopt access bylaws that contained almost any restriction on the shareholders eligible to submit nominees.  See Brief of Business Roundtable, at 8 (noting that Section adopted to "clarify that companies can adopt bylaw provisions allowing shareholders to include director nominees in company proxy materials.").  It is as if Section 112 changes the access landscape but, as a mere clarification, it does not. 

The Brief also provides that in adopting the provision, "Delaware deliberately followed the longstanding Delaware principles of stockholder choice and private ordering."  True, but the problem with promoting Section 112 under the private ordering banner is that there hasn't been any.  In fact, prior to the adoption of Section 112, when these types of provisions were in fact allowed, only three companies voluntarily gave shareholders access to the proxy statement (Comverse, Apria and RiskMetrics) and only one company saw the adoption of an access bylaw (Cryo-Cell).  See The SEC, Corporate Governance, and Shareholder Access to the Board Room.  In the aftermath of the adoption of Section 112, no company, apparently, has adopted an access bylaw.

Moreover, the adoption of Section 113 (permitting bylaws that can require the mandatory repayment of proxy expenses) sheds some light on the "private ordering" debate.  It did not merely clarify but actually changed the law, effectively overturning CA v. AFSCME.  Boards and companies are now free to engage in private ordering and put in place bylaws that provide for mandatory reimbursement of proxy expenses. 

In fact, no company has such a bylaw.  One company does have a provision that provides for reimbursement but the provision contains a "fiduciary duty" out clause.  (Reimbursement will be provided under certain circumstances, "subject to certain conditions including the board of director's determination that reimbursement is consistent with its fiduciary duties.").  Thus, effectively, the provision is not mandatory but within the discretion of the board.  This type of provision was permissable before the adoption of Section 113.  

In other words, there was no private ordering prior to the adoption of Sections 112/113 on the issues of reimbursement and access and there has not been any afterwards.  Given the limits imposed on shareholdes with respect to private ordering, there is no reason to believe it will occur should the SEC's access rule go away.  Indeed, as we have written: 

• The evidence in fact suggests that in the absence of a federal requirement, companies will opt for a categorical rule denying access. They will do so either by not adopting access bylaws (and vigorously opposing shareholder proposals to institute access) or by adopting access bylaws with restrictions that largely render access meaningless.

Majority Voting, Delaware Statutory Reform, and Shareholder Access to the Proxy Statement: A Comment to the Securities and Exchange Commission. 

For a history of the SEC's efforts to provide for shareholder access (a process that dates back to 1942), see The SEC, Corporate Governance, and Shareholder Access to the Board Room.  Assorted briefs and motions in this case can be found at the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on February 02, 2011 (boomark / email).